DO YOU HAVE A RESERVATION? WHAT EVERY CONDOMINIUM MANAGER AND BOARD MANAGER SHOULD KNOW ABOUT THE “RESERVATION OF RIGHTS” INSURANCE DEFENSE LETTER AND BEYOND

Published on: December 15, 2017

What is better than a dinner reservation? The condominium board members have been looking forward to that meal all week.  It’s a new place, they have been dying to try it.  Suddenly, they get sued.  Now they go from dinner reservations to insurance reservations.  Their appetite is lost.

Your Condominium gets sued. Sorry but it happens.  What is the first thing you should do?  You guessed it, contact your lawyer, sadly he has an appetite for litigation.  Your lawyer should then contact your insurer.  There is a reason why you want your lawyer to make the notification.  Because he or she knows the lingo (or at least they should) and they know how to protect you, so you can get back to dinner.

However, it does not always work that way. Sometimes the insurer gets contacted separately and sometimes the insurer avoids the lawyer and contacts the Board directly (usually for their own purposes), there goes our appetite again.

When a condominium gets sued and the lawsuit is presented to the insurer, the insurer typically has 3 responses to the claim.

  1. First the insurer can deny coverage. This is typically because the claim falls within some exclusion (it could be a mold exclusion), falls outside the policy period or was not timely made in accordance with the policy (all insurance claims should be made promptly). When a claim is denied, the condominium should have its lawyer review the denial for comparison with the policy to ensure that the denial was proper.
  2. Second, the insurer can provide coverage or indemnity. In this case, the Condominium should be happy, because that means that if the Condominium loses the case, then the insurer will pay the judgment and along the way will pay legal fees (minus the deductible). In cases where indemnity or coverage is granted, the insurer gets to control the lawsuit and make all litigation decisions, including the decision to hire its own insurance counsel, who likely knows next to nothing about condominium law. Your mind should be at ease, you can go back to thinking about that desert you wanted to try. However, don’t just skip right to desert. In cases where indemnity or coverage is provided, a condominium can still ask to have it general counsel represent the condominium, which the insurer may or may not be inclined to do (sometimes the condominium lawyer is on the panel for the insurer). In cases where indemnity or coverage is provided, the insurer typically gets to decide whether or not to settle the case. Now this is not always true, some policies have a consent to settle provision. The condominium may want to have its general counsel check to see if a consent to settle provision is contained within the policy. Lastly when it comes to coverage, the condominium needs to be mindful that coverage is available only up to the policy limit (this can be tricky if its “eroding policy”, i.e. one where legal fees expended by the insurer reduce the policy limit). If the policy limit is One Million Dollars and the claim is for Five Million Dollars, then the condominium may want to have its general counsel involved in the case anyway, because the condominium wants to protect against the danger of uninsurable losses (again the condominium’s general counsel might be able to assist the insurer’s counsel in this situation due to his familiarity with the property or knowledge of condominium law and ultimately protect the condominium from a huge judgment that exceeds the amount of the policy). In that situation, the condominium may even want its general counsel to insist that the insurer settle the case for the policy limit early on—as an additional measure of protection. It makes sense to run the scenarios by your general condominium counsel just in case any of the above scenarios apply, it is worth the 30-60 minutes of time, and then you can get to your after dinner drink.
  3. Third and the one that condominiums see most often is the reservation of rights letter. In a reservation of rights letter, the insurer hedges its bets. The insurer usually takes 8 pages to say we are not sure if the lawsuit is covered. They say that they are going to wait to see what the Court says (if it ever gets that far) or what the evidence reveals to make a determination as to whether the claims are covered or not. A letter of this type usually has the phrase “reservation of rights” or “full reservation of rights” appear in the header or on the last page or on every page. When an insurer reserves its rights in Massachusetts, the condominium has the ability to: (1) select its own lawyer, which the insurer pays for (except for the deductible) and (2) make all decisions re the control and defense of the litigation including whether or not to settle the case and on what terms.

That being said in the “reservation of rights” category, often times insurers will try to appoint their own insurance lawyers and will control the case any way. In fact, most insurers do this every time even though it is a blatant violation of the law and in my opinion constitutes an unfair and deceptive insurance practice.  Some insurers just have an appetite for destruction.  So why does the Condominium care?  The Condominium should care, because the lawyer appointed by the insurance company to defend the condominium has a business relationship with the insurer.  They have a conflicted loyalty.  They also do not know condominium law.

I have personally seen many condominium insurance cases that could have been dismissed out of the gate where the insurance lawyer does not even bother to move for dismissal. Why?  Because the insurance lawyer wants to make the case last longer because that is how he gets paid.  The insurance lawyer has no continuing relationship with the condominium, like the condominium lawyer does, who wants to see his client disentangled from a lawsuit as quickly as possible, as that is in the best interest of a continuing relationship.  I, like a fine restaurant want to be around for many years. Usually the condominium wants the litigation over as quickly as possible because it can impacts value and sales, as well as being a distraction, time consuming and aggravating.

More important, if a condominium is going to get sued, the condominium wants to control the lawsuit decisions, the settlement decisions (if any), which is its legal right when a “reservation of rights” letter issues.

While the condominium should definitely consult its counsel when a “reservation of rights” letter is issued, a brief consultation is probably warranted when either a denial or coverage is provided. Let your condominium lawyer handle this for you, condominium board members should be more concerned with dinner reservations than insurance reservations.

If you have any questions about this article contact Ed Allcock at eallcock@meeb.com.